Highly populated states will likely run out of money to fund unemployment benefits

Posted at 4:45 PM, Apr 16, 2020

WASHINGTON, D.C. – The unemployment rate in the U.S. continues to climb as COVID-19 continues to plague the country. The latest data shows 5.2 million Americans filed for unemployment last week, bringing the total to around 22 million jobless claims since the coronavirus began to spread in the U.S. in mid-March.

“8.4% of the civilian labor force has now applied for or is already receiving unemployment compensation benefits,” said Jared Walzak with the Tax Foundation in Washington D.C. “The previous record was about 7.9%, so this really is unprecedented.”

The Tax Foundation has been monitoring states’ solvency, essentially how long each state can afford to pay out unemployment compensation benefits before they run out of money in the state trusts.

“Many states are grossly unprepared, unfortunately, for a magnitude of the crisis we are facing,” said Walzak. “There are six states that can cover fewer than 10 weeks of unemployment compensation benefits based on the amount of claims we have seen thus far.”

These are states like California, Texas and New York, that collectively make up one-third of the U.S. population, and will run out of money to fund their unemployment benefits in two-months.

“Now individuals in the states will receive benefits, but states are going to have to draw from other funding sources and they are going to have to borrow from the federal government,” explained Walzak.

Looking at the tax foundations map on state trust fund levels, it’s clear many states will end up borrowing from the federal government to cover unemployment benefits. In doing so, some may then be hit with an interest penalty because they weren’t solvent enough.

That penalty is typically passed down to businesses, in the form of an unemployment tax increase.

“You understand why this could happen in a social insurance type of program, but it is really counterproductive right now and states should really look at ways to address that to make sure businesses don’t get shuttered,” said Walzak.

A new poll by Met Life and the U.S. Chamber of Commerce reveals 11% of small businesses say they are less than a month from permanently going out of business. Adding an increased tax to those that are hoping to reopen could have a big impact on the number of businesses that can afford to reopen their doors.